Tuesday, April 29, 2008

An article in the Washington Post makes a point that should be obvious, but wasn't to me. The falling value of the US dollar makes life easier for companies that have goods to sell foreigners (Harley Davidson Motor Cycles, I hope). It also makes more expensive the million things Americans buy from abroad. And it helps US tourism; visiting here becomes the thing for foreigners to do. Just as predictably it encourages European and other overseas buyers to pick up pieces of us -- our real estate, our companies; farms, factories, and franchises. Here's the citation: What Can They Buy? A Good Bit of Us., by Moisés Naím (Washington Post, Sunday, April 27, 2008; Page B04). The author says,

U.S. companies have rarely been so cheap. Five years ago, a German or Spanish company that coveted a U.S. competitor worth $500 million needed almost 550 million euros to purchase it. Today, it would take just 319 million euros. The U.S. marketplace will be altered by an infusion of new foreign competitors that will manufacture their own products in the United States. These firms will use their new American base both to export to the world -- including their own European markets -- and to serve the U.S. market from inside its borders.

Such a transatlantic shift will inevitably, ignite a political firestorm on both sides of the Atlantic. [But] it will be impossible for U.S. politicians to stop the Euroinvasion, and European politicians will prove equally helpless in preventing their companies from moving to the United States. While blocking a few large investments by foreign government-owned funds in U.S. ports, defense industries and oil companies may be possible, preventing thousands of private companies from investing in the United States is not. Although difficult economic times always create political opportunities for demagogues and populists, the United States is far from ready to repeal capitalism. And stopping the Euroinvasion will require nothing short of that.

An article from Agence France Presse adds a bit of spice to this thought. Although much of the foreign investment in the US is coming from individuals and private corporations, much is also coming from large financial concerns, among them the huge sovereign wealth funds that governments have set up to manage their budget surpluses. The article says these surpluses are large and growing. Here's the head and lede: Sovereign wealth funds hit 3.5 trillion dlrs in 2007: US firm.

Sovereign wealth funds have mushroomed 24 percent annually over the past three years to hold a total of 3.5 trillion dollars in 2007, a US economic firm said Monday.

Global Insight said that projected on that annual growth pace, sovereign wealth funds (SWFs) would surpass the entire current economic output of the United States by 2015, and the European Union by 2016.

As always, there's concern that these government-run funds will be used for political not just economic purposes. Of course the unbelievably large US deficit makes this country vulnerable to blackmail by other governments simply because we rely so greatly on them to help cover our debt through purchase of US Treasuries and the like. The potentially inimical actions of sovereign wealth funds adds spice to the paranoiac mix. It's not just the uncomfortable feeling one gets on realizing that -- more and more -- foreigners "own" us; it's also the risk that they'll let it be known that they will do some destabilizing action, like a sudden shift in investment that puts thousands of Americans out of work, unless the US government takes a position that agrees with theirs (reduces or eliminates US subsidies for farm products for example).

Along with these two somewhat scary stories comes one of a type that's becoming increasingly familiar. The price of the energy we use is likely to continue to rise. As Al Jolson said "You ain't seen nutt'n yet." From the Financial Times: Opec says oil could hit $200, by Carola Hoyos in London. The article says that oil continues to cost more partly because the US dollar is worth less and less. But, as we all know, the price is also manipulated by suppliers. There's no free market for oil. The wonderful discipline of oil producing nations enables them to screw the rest of the world if they wish, and apparently they do. There's nothing new about this state of affairs. For a long time we've been living in paranoia over the havoc that OPEC could wreak in the US economy. In fact our carefully maintained good relations with Saudi Arabia might be something of a bellwether for our life a world of cheap dollars where foreigners buy up America. I mean to say the huge diplomatic, commercial, and political efforts to stay on the good side of the Saudi ruling family may be a useful learning experience as we find ourselves required to make nice to many others who could do us harm.

Addendum:The Washington Post has an excellent article on the global escalation of food prices: The New Economics of Hunger, A brutal convergence of events has hit an unprepared global market, and grain prices are sky high. The world's poor suffer most. For the 1 billion people living on less than a dollar a day, the world's worst food crisis in a generation is a matter of survival. By Anthony Faiola, Washington Post Staff Writer, Sunday, April 27, 2008; Page A01

The article makes it plain that nations are interdependent and there's no policy that is purely domestic. We no long live in a world where any nation can act unilaterally to protect its citizens. For example, a country that fears the consequences of rising grain prices may wish to stockpile grain, but this stockpiling makes prices rise higher and faster and consequences are bad for all. Similarly, fears of dwindling supplies may cause grain producing nations to control exports. That action reduces world supply of course, driving prices higher, even within the nation that's trying to control exports. (And resorting to price controls to prevent price rises can destabilize the country's financial markets with further unfortunate consequences.)

It's another indication, for me, that the US habit of acting unilaterally has had its day. We're still the dominant world power, but our ability to influence affairs with selfish arrogance is growing weaker and weaker.

Saturday, April 26, 2008

It's the birthday of Anita Loos. I most happily first made acquaintance with her in a paper my daughter wrote in high school. A Hollywood brat when Hollywood was itself infant, she was a child actress but quickly transformed herself to screenwriter. Much of her fascination comes from this early decision. Glamorous, charming, and well-connected with studio big shots, she was a celebrity of a different sort. One that's still surprisingly rare.

Career highlights include the comic novel Gentlemen Prefer Blondes. Her screen credits are summarized in the poster images (below) I've taken from the Answers.com presentation.

She also wrote for Broadway: The Whole Town's Talking (1932), Happy Birthday (1946), and her dramatization of Colette's novel Gigi (1951).

She wrote for high-brow magazines like Harper's Bazaar, Vanity Fair, and -- take note -- The New Yorker.

Memoirs include her successful autobios A Girl Like I (1966) and Kiss Hollywood Goodbye (1974), as well as books on Broadway such as her 1972 book Twice Over Lightly: New York Then and Now, written in collaboration with friend and actress Helen Hayes.

Posters of some of the movies for which she wrote scripts:

Some quotes:

"Fate keeps on happening."

"The people I'm furious with are the Women's Liberationists. They keep getting up on soapboxes and proclaiming women are brighter than men. That's true, but it should be kept quiet or it ruins the whole racket."

"If we have to tell Hollywood good-bye, it may be with one of those tender, old-fashioned, seven-second kisses exchanged between two people of the opposite sex, with all their clothes on."

"There is a serious defect in the thinking of someone who wants -- more than anything else -- to become rich. As long as they don't have the money, it'll seem like a worthwhile goal. Once they do, they'll understand how important other things are -- and have always been."

"I really think that American gentlemen are the best after all, because kissing your hand may make you feel very good but a diamond and a sapphire bracelet lasts forever."

"A girl with brains ought to do something with them besides think."

"I once witnessed more ardent emotions between men at an Elks' Rally in Pasadena than they could ever have felt for the type of woman available to an Elk."

"Show business is the best possible therapy for remorse."

"The rarest of all things in American life is charm. We spend billions every year manufacturing fake charm that goes under the heading of public relations. Without it, America would be grim indeed."

In 1921, Loos was among the first to join the Lucy Stone League, an organization that fought for women to preserve their maiden names after marriage.

Asked how to say her name, she told The Literary Digest "The family has always used the correct French pronunciation which is lohse. However, I myself pronounce my name as if it were spelled luce, since most people pronounce it that way and it was too much trouble to correct them." (Charles Earle Funk, What's the Name, Please?, Funk & Wagnalls, 1936.)

She once commented. "I've had my best times when trailing a Mainbocher evening gown across a sawdust floor. I've always loved high style in low company." Anita Loos died in New York City at the age of 93 from natural causes. She is interred in Etna Cemetery, Etna, California, with her second husband, John Emerson, her parents, her brother and sister, and maternal relatives.

Wednesday, April 23, 2008

I've written before about how low interest rates have fueled consumption in the US and how, in turn, this consumption has helped countries that export to the US, notably the oil producing nations and China. I've been a little fuzzy about one aspect of this bilateral binge. The cycle of accelerating indebtedness and import frenzy has been accompanied by the purchase of huge chunks of US debt by foreigners (among them the oil producers and China). But with low interest rates these investors in American debt might have sought to put their money elsewhere, where it would earn a greater return.

Why have foreigners continued to invest in US debt when there has been more money to be made through investments elsewhere at higher return?

To some extent they put money into the US financial markets because that enabled Americans to continue buying from them. To some extent because the huge imbalance of trade between the US and other nations resulted in huge stores of US dollars that needed, one way or another, to be repatriated. To some extent since the US dollar is the defacto medium of exchange across the globe and, because of that, all nations have an interest in preventing its collapse. (A collapse that would probably result from failure of foreign nations to finance US deficits and its those foreigners financing US deficits enabled the US to keep interest rates low.)

But to some extent the put their money into the US financial markets because they see the US mainly as a customer for their output (whether oil or t-shirts). They see themselves as producers more than as investors. Their dollar hoards are more of a problem for them than an opportunity. Yes, they represent wealth, but -- such is their abundance -- these hoards need to be carefully managed to insure that the main business -- production -- continues to grow.

All this is long preamble to a link to a current article by Steven Pearlstein. He writes today about how the habit we Americans have of living beyond our means is a main source of the financial crisis we have created and the world now suffers from. In doing so he draws attention to the phenomenon I've just drawn attention to. I urge you to read the article.

Its upshot is what many have already said, global prosperity cannot be sustained simply by the huge amounts of over-consumption we've seen in the US over recent years. There has to be an international rebalancing. He says we Americans have been living way beyond our means, consuming more than we produce and investing more than we save. Other nations, such as China and Saudi Arabia have been willing to finance our trade deficit on easy terms because it allows them to peg their currencies to the dollar in a way that generated higher job creation and economic growth in their home markets. This mutually advantageous imbalance in trade and investment flows has created a huge supply of cheap dollar-denominated credit that virtually invited the bankers and brokers and rating agencies and private-equity firms in U.S. markets to throw caution to the wind and make ill-advised lending and investing decisions.

Some excerpts:

If this is the case -- if the story of the credit bubble and its bursting is more fundamentally about macroeconomic imbalances than microeconomic failures -- that has very different implications for where we go from here.

For what it means is that things won't be "fixed" simply by having the financial sector write off its losses and bad loans and promise to do a better job next time with risk management. Rather, it will require a reduction in the overall standard of living in the United States so that the country as a whole begins to live within its means.

What does that mean exactly?

In practical terms, it means that households will have to reduce consumption, increase savings and stop piling up credit card debt or using home equity as an ATM.

It means that the federal government stops running huge operating deficits by raising taxes or dramatically cutting national security and entitlement spending.

Such a broad reduction in wealth and living standards will take many forms. It will come in the form of higher unemployment and stagnant wages and falling income, which take statistical form in slower or even negative economic growth. It will come in the form of inflation and its first cousin, a lower value for the dollar. And it will manifest itself in lower values for pension funds, 401(k) accounts, university endowments and house prices.

You don't have to have a PhD in economics to see that this adjustment is underway. But it would be folly to assume that it is anywhere near completion. After all, it took many years for our collective standard of living to get out so far out of whack, and it's highly unlikely that we are somehow going to reverse things in a couple of quarters. And the bubbles in commodities and commercial real estate are still to pop.

What Pearstein doesn't say, because it's not his subject, is that the producing nations whose exports we have been consuming are becoming disenchanted with the US market and the US dominance in world finance. China is diversifying its manufacturing, finding a growing number of customers outside the US, and, by the growing prosperity of its citizens, making its own internal markets. Saudi Arabia and the other oil producers are finding other markets as well, notably within the newly-emerging economic powerhouse countries -- that is China, India, much of South-East Asia, and, eventually within Latin America as well. Along with this the decline in value of the US dollar is encouraging money men to think of international finance in terms of a market basket of currencies, including notably the euro as well as the dollar. The evolutionary impulse of these two shifts will reinforce the changes that Pearlstein predicts.

Tuesday, April 22, 2008

Update: The outcome of surgery has been good so far. An article on Yahoo Sports says Davis Phinney experienced the expected immediate relief Doctors promised. The article quotes his wife: '“We saw an almost immediate response,” Connie Carpenter-Phinney said. “The actual tremor is almost gone but not totally gone. His gait was really good. His arms were swinging. I’m super-relieved. Literally, it brought tears to my eyes to watch the process, and it’s a very moving experience to watch what might be possible down the road.”

Davis Phinney was exhausted after Friday’s procedure, but squeezed in one key event before settling down for an afternoon nap.

“We went out for a celebratory ice cream,” his wife said.'

I watch videos of old bike races while I tread the mill for exercise. Currently, I'm engrossed in the 1987 Tour de France. Lately I've been reading about the struggles with Parkinson's Disease of a bike racer of that time, Davis Phinney. He's just undergone surgery to reduce some of the worst symptoms. He and his family won't know whether the surgery worked until this Friday. His wife, Connie Carpenter Phinney, is a world champion cyclist and now their son Taylor looks to be following in their footsteps.

Davis won a stage in the 1987 Tour, one of the few Americans to claim that victory at the time. He spoke to the camera a couple of times early in the race, always charming, articulate, upbeat, and interesting to hear. Then he caught a bug and had to retire. (Professional cyclists are particularly vulnerable to infections; one of the many mishaps that can sideline them.) Seeing the man in his 1987 prime brought out much compassion in me toward his 48-year-old self brought low by Parkinsons.

Friday, April 18, 2008

In his blog, Science and Reason, Charles Daney has a current post on Consciousness, free will, etc.. It deals with experiments that show our conscious decision-making to be strongly influenced by our subconscious decision-making, and in some cases not just influenced but fully determined by the subconscious.

He and the scientists he quotes tend to conclude from these experiments that there's precious little free-will, Untainted, conscious, decision-making may be much more rare than we have thought it to be.

The evidence seems strong and there's lots of it. He quotes one experiment reported in New Scientist in which computer brain scans showed subconsious decision-making to precede conscious decision-making by a full seven seconds: "Researchers pinpointed a signal that divulged the decision about seven seconds before people ever realised their choice."

I know something of this from self-observation. I've always been uncomfortable at how susceptible I am to manipulation by sales people, whether car salesmen (invariably men for some reason) or people trying to get me to buy a time-share (having been enticed to listen to the sales pitch by a valuable perk of some kind).

On the other hand, an article to which Daney points, tells us that "using subtle cues for self-improvement is something like trying to tickle yourself, priming doesn’t work if you’re aware of it. Manipulating others, while possible, is dicey." It quotes one researcher: “We know that as soon as people feel they’re being manipulated, they do the opposite; it backfires."

And so, though I'm sure I've been unwittingly manipulated time and time again, I've found I tend to end up purchasing my car from the least-overtly manipulative sales people and I've never signed on the dotted line for a time-share.

The article quoted above, from the NYT in July 2007, also reminds us that "subliminal suggestion" was a hoax. Flashing the names of foods on a movie screen too rapidly to be perceived by our vision does not increase sales of Coke and pop corn. So too, we found that you couldn't learn a new language or finally come to understand algebra by putting a cassette player under your pillow to instruct you while you slept. Another hoax.

Still, it's disconcerting how easy it is to manipulate people without their knowledge. The experiments are generally trivial in nature, but they point to ominous conclusions. Among these are the sorts of mass hysteria that lead to the obliteration of entire peoples -- the Jews in Europe by the Germans, Muslims in Bosnia by Christians, ethnic Africans in Darfur by ethnic Arabs, urban residents in Cambodia by the Khmer Rouge. These tragedies must partly be caused by subconscious effects of political rhetoric. Daney links to an article that deals with this subject. The research sought to find out whether "reminders of death increase the need for psychological security and therefore the appeal of leaders who emphasize the greatness of the nation and a heroic victory over evil." And the experiment found that subjects were eight times more likely to choose a charismatic political candidate over others who were either pragmatic or relationship-oriented.

I'd like to believe this crude manipulation could not occur on subjects who were alert to its likelihood. And, indeed, half of American voters might be said to have some resistance to fear mongering by the Bush presidential campaign of 2004.

Daney's blog post proceeds from subconscious manipulation to consider other ways in which our consciousness is altered by external conditions. He brings up the fixation of memories, the importance of attention and its connection to memory, and the effects of mind-altering drugs. It's worth a read.

“When it comes to our behavior from moment to moment, the big question is, ‘What to do next?’ ” said John A. Bargh, a professor of psychology at Yale and a co-author, with Lawrence Williams, of the coffee study, which was presented at a recent psychology conference. “Well, we’re finding that we have these unconscious behavioral guidance systems that are continually furnishing suggestions through the day about what to do next, and the brain is considering and often acting on those, all before conscious awareness.”

Dr. Bargh added: “Sometimes those goals are in line with our conscious intentions and purposes, and sometimes they’re not.”

The results suggest a “bottom-up” decision-making process, in which the ventral pallidum is part of a circuit that first weighs the reward and decides, then interacts with the higher-level, conscious regions later, if at all, Dr. Frith said.

Scientists have spent years trying to pinpoint the exact neural regions that support conscious awareness, so far in vain. But there’s little doubt it involves the prefrontal cortex, the thin outer layer of brain tissue behind the forehead, and experiments like this one show that it can be one of the last neural areas to know when a decision is made.

Using subtle cues for self-improvement is something like trying to tickle yourself, Dr. Bargh said: priming doesn’t work if you’re aware of it. Manipulating others, while possible, is dicey. “We know that as soon as people feel they’re being manipulated, they do the opposite; it backfires,” he said.

And researchers do not yet know how or when, exactly, unconscious drives may suddenly become conscious; or under which circumstances people are able to override hidden urges by force of will. Millions have quit smoking, for instance, and uncounted numbers have resisted darker urges to misbehave that they don’t even fully understand.

Yet the new research on priming makes it clear that we are not alone in our own consciousness. We have company, an invisible partner who has strong reactions about the world that don’t always agree with our own, but whose instincts, these studies clearly show, are at least as likely to be helpful, and attentive to others, as they are to be disruptive.

Tuesday, April 15, 2008

I'm ashamed for the nation, this nation, of which I am a citizen. Here, where I live, more than 3 percent of adults are either incarcerated, on parole or probation or under the supervision of a state or local authority. That's one in 32. Marie Gottschalk writes about this in today's Washington Post. She tells us eleven percent of young African Americans is in prison or jail. Half the people in American prisons are black.

Do they deserve it? No. The incarceration rate in the US is 12 times greater than the rate in comparable industrial nations. We don't really have 12 times more law-breakers. What we have is a sentencing policy that puts people away and keeps them there. The prisons are full and prison populations are growing faster than the rate of population increase simply because sentences are too long. Gottschalk says: 'Even former president Bill Clinton, whose administration was an accomplice in the largest prison buildup in U.S. history, conceded in a keynote address at a University of Pennsylvania in February: "Most of the people who went to prison should have been let out a long time ago."'

She says "The leading presidential candidates have not identified mass imprisonment as a central issue, even though it is arguably the country's top civil rights concern. Many of today's crime control policies fundamentally impede the economic, political and social advancement of the most disadvantaged blacks and members of other minority groups. Prison leaves them less likely to find gainful employment, vote, participate in other civic activities and maintain ties with their families and communities."

BOJ Probation and Parole Statistics say that the number of people on parole is increasing at a slower rate than in the past partly because of a change in policy: some states have abolished parole board authority for releasing prisoners. Also: although half the prison population is black, only 29% of parolees are black.

In 2005, over 7 million people were under some form of correctional supervision including:

Probation - court ordered community supervision of convicted offenders by a probation agency. In many instances, the supervision requires adherence to specific rules of conduct while in the community.

Prison - confinement in a State or Federal correctional facility to serve a sentence of more than 1 year, although in some jurisdictions the length of sentence which results in prison confinement is longer.

Jail - confinement in a local jail while pending trial, awaiting sentencing, serving a sentence that is usually less than 1 year, or awaiting transfer to other facilities after conviction.

Parole - community supervision after a period of incarceration. These data include only adults who are on active or inactive parole supervision or some other form of conditional release, including mandatory release, following a term of incarceration

Saturday, April 12, 2008

I've long been fond of Rosemary Sutcliff's historical novels. She wrote for young adults intelligently, without condescension. Some of her best track descendants of Marcus Flavius Aquila who lived in Roman Britain ca. 133 A.D. and who possessed a dolphin ring which turns up on the hand of his successors as the centuries pass.

Frontier Wolf is one of my favorites in this series. Its hero, Alexios Flavious Aquila, overcomes many difficulties eventually to make his mark.

Like Kipling, Sutcliff knew how to tell a story without oversell or cheap drama.

And like his, her descriptions sometimes take your breath away. In Frontier Wolf she tells how a "brief wing of sunlight brushed along the flank of the little glen," describes the "dark soughing of the wind across the dead heather," and reveals for us "the green rooty smell of things growing, and the air full of the lonely bubbling mating-call of curlew." On a hunt together Alexios and a native chieftain become close friends and "the first pollen scattered from the whippy sprays so that they rode through a sudden golden mist."

In one passage Alexios is leading a small group of survivors from a northern outpost that has been attacked by overwhelming numbers of enemy tribesmen. It is midwinter and the troop is cold, hungry, exhausted, and aware that their enemies are close behind them. Sutcliff's language lets us know that there is a small, bleak hope for them in the midst of this awfulness. She describes the scene thus: "Snow was still spitting down the wind as they rode out, but the sky was less full than yesterday; and presently as they rode, the low dawn showed a bar of cold daffodil yellow through a break in the cloud-room far down to the south-east."

Days later most of the troop has managed to survive, still harried and now grievously saddened by discovery that a fort where they sought refuge had already been sacked by their enemies. Somehow they find the strength to continue and Sutcliff again signals the small element of hopefulness that is theirs: "Somewhere in a bare thicket of rowan and hazel a robin sang as though there was no sorrow in the world, and from the skein of men behind him someone whistled back."

Finally regaining the safety of a fort on the Roman Wall far to the south of their starting point Alexios observes the land to the North and Sutcliff tells us Spring is near: "A puddling of snow still lingered in the hollows; and far off, the higher hills of the Frontier Country were still maned and crested with white; but nearer moors showed the sodden darkness of last year's heather, and the wind that always harped along the Wall had gone round to the West, and the green plover were calling."

Thursday, April 10, 2008

Newspapers are reporting that China's currency has appreciated against the US dollar to the highest point since 1994. This pleases US policy makers who maintain that the Yuan has been artificially low.

As the Yuan rises in value, Chinese exports become more costly to Americans. Americans who spend a lot of time in Wal-Mart and Target have benefited from the cheap Yuan. They'll regret the appreciation of the currency. American producers consider the cheap Yuan to be unfair competition. American politicians dislike the unequal trade balance that has resulted, as exports from America to China represent only a tiny offset to the enormous volume of American imports from China.*

Things are much more complicated than that.

China has been constrained from letting the Yuan rise in value because its factories provide employment to millions of its citizens. The nation set a fixed ratio of the Yuan to the dollar at least partly in order to stimulate exports and thus provide jobs to those who were barely surviving on subsistence agriculture. Chinese factories produced cheap clothing and other low-wage goods, Americans bought this output, and the Chinese economy grew at a rapid rate.

China sees that there are limits to this policy and has more recently begun to diversify its manufacturing. It has been purchasing high-tech production equipment and improving educational opportunities so that it can develop a better-trained workforce and produce more sophisticated goods and services.

It has been induced to make this change partly because its currency manipulation has stimulated inflation and partly because middle class Chinese people need better investment opportunities: it does not make sense for them to continue to invest in low-end manufacturing.

Chinese policy makers also realize that as Chinese people gain wealth (or at least reasonable incomes) from exports, their desire to consume high-end goods and services increases. The Chinese government would prefer to meet this need from within China rather than by way of imports.

Inflation is a world-wide concern. The price of oil continues to rise and now rises in the price of food are causing great concern. China has to worry about the rising price of rice as much as do its Asian neighbors. There's great risk that people who can't afford food will rebel against their governments.

Echoing many financial experts, a blogger says China should be more aggressive in revaluing its currency:

China should have begun the appreciation of [its currency] much earlier than it did and it should have appreciated more aggressively. Unfortunately, perhaps because of the excess global liquidity of the past few years and especially of the past few months, China is now caught in a monetary trap in which the high trade surplus forces the central bank to buy large amounts of foreign exchange, which of course causes very rapid domestic money expansion. This money expansion feeds directly into excessively high levels of investment, which force up industrial production and so causes the trade surplus to rise or remain high. It will be extremely difficult for China to get out of this trap.

As China’s labor force, especially in the wealthy south and southeast, move out of low value-added assembly and into higher quality manufacturing and service jobs, companies that rely on cheap, unsophisticated labor will necessarily find conditions more difficult and may even go out of business.

Policies aimed at creating a higher quality manufacturing and service base in places like Guangdong are succeeding. As long as overall exports continue to grow it is hard to see how the rising RMB** has caused trouble for Chinese exporters in general.

In China, appreciation will not reduce inflationary pressures through the price impact on imported goods. It can only really reduce inflation if it reduces the amount of foreign exchange the central bank has to buy every month, and so reduce the growth of the domestic money supply. As long as China’s money supply keeps expanding at such a fast pace, it will be impossible to bring inflation down, and as long as the central bank is forced to purchase very high levels of foreign exchange every month, China’s money supply will keep growing too quickly. The recent appreciation has done nothing to slow the trade surplus but it may have increased speculative inflows, so it actually causes an even further increase in the money supply.

Chinese policy makers say this analysis overstates their ability to revalue the Yuan. There is a limit to how quickly the country can replace low-level manufacturing with manufacturing that requires a more educated workforce. Moving too fast could cause economic chaos world-wide.

The US and other western governments don't substantially disagree, but see it as in their interest to keep the pressure on China.

Coincidentally, the global concern with inflation and the rising price of food comes as China is attempting to show the best side of itself with the coming Olympic games. Its difficulty in answering critics of its civil rights policies in general and in particular of its policies toward Tibet is only one of many concerns connected with this aim to look good.

China thus has lots of reasons to allow its currency to continue to appreciate.

One final complication, however, is the expected recession in the US and (to a lesser extent) around the globe. That event will cause American imports to decline and the decline in imports from China will provide counter-pressure against appreciation of the Yuan. The logic is thus: appreciation increases the price of exports and reduces the expansion of the Chinese money supply through purchase of dollars. US recession reduces the volume of exports and this makes it less necessary to purchase dollars. The result is less need to purchase dollars and consequently less inflationary pressure on the economy.

If China succeeds in controlling the rise in prices of oil and food imports, the recession in the US and slowed growth throughout the world may give Chinese policy makers greater flexibility in transforming the country's industrial infrastructure from low-end toward high-end manufacturing. If they do get this flexibility and use it wisely, expected benefits should flow over from China to the global marketplace. That is to say, all of us stand to benefit from Chinese modernization. However, these benefits will not be evenly distributed (whenever are benefits evenly distributed?) and, in the long run, while the US may be able to increase exports to China, it will not be easy for Americans to make a transition from prosperity based on expanding consumption (driven by low interest rates and manifested substantially in an abundance of cheap imports from China) to one in which interest rates are more rational (i.e., higher) and prosperity is achieved by growth in production as much as by growth in consumption. Along the way, as I've said, there's a good chance that the US will lose its status as preeminent financial power.

One last quote. Here is the head of the IMF on the Chinese economic situation. Note that he mentions social inequality, energy efficiency, and social services as areas that the Chinese government should address in addition to more purely economic and financial ones. He doesn't say so outright, but it's implicit that carbon emissions and other forms of pollution are and should be a major concern. It's not his place to add that China needs to address the corruption of its political regime. Although China has immensely talented and well-educated bureaucrats and policy makers, Party hacks block needed economic, social, and political reforms, and -- to some extent -- permeate the government from top to bottom. And the Chinese judicial system is unable to insure due process either for the Chinese people or those who do business with them.

The Chinese government is confronting several macroeconomic policy challenges, including preventing inflation—largely the result of food price increases in recent months—from becoming entrenched, and rebalancing growth away from heavy reliance on exports and investment toward consumption. Addressing social inequalities and improving energy efficiency are also priorities.

We agreed that continued tight monetary policy will be important in containing investment growth and inflationary pressures. The government's emphasis on reorienting the budget toward improving social services—including health and education programs—can also help both to reduce disparities and rebalance growth. In addition, we also see the government's focus on financial sector reforms as key for achieving these goals. On exchange rate policy, we welcome the authorities' objective of allowing greater flexibility over time. However, we encourage a faster pace of appreciation that would be helpful for addressing China's key economic challenges and would also contribute to preserving global economic stability.

-----------* The BEA reports that the Chinese trade surplus with the US was $20 billion in January and a little less in February. $20 billion is more than a quarter of the total January deficit in US import/export of goods.**RMB: The renminbi (literally "people's currency") is the currency of the mainland of the People's Republic of China whose principal unit is the yuan. (Wikipedia)

Earlier this week we spent our dinner hour watching Jonathan Demme's film, Jimmy Carter Man from Plains. It's a fine movie though its eulogistic tilt can be annoying (however much agreed with). Discussion of opinion within Israel about the rights of residents in the Palestinian territories reminded me about the perils of proportional representation, a well-intentioned electoral policy from which Israel suffers.

Today, the papers tell us Carter will soon be meeting with an exiled Hamas political leader in Syira. The accounts bear out something that's made plain in Demme's film: While popular with Jewish voters in the U.S., Israel's policy of ostracizing Hamas is not universally approved within Israel. A recent poll, reported by the Israeli paper, Haaretz, showed a surprising 64 percent of Israelis to favor direct talks with Hamas. I've quoted the article below.

The connection with proportional representation is not brought out in the news accounts but seems plain to me. PR results in coalition governments in which minority parties can frequently dictate policy. As I understand the situation, Israeli settlers in the territories are supported by one such minority party which, as things turns out, has sufficient leverage to insure that Israel rules out any possibility of negotiation as it continues to use military force against Hamas and the Palestinian terrorists in the territories. This policy results in actions aimed at protecting Israeli settlers at the expense of the Palestinian population in general (that is to say there is little attempt to protect the civil rights of Palestinians, at least partly on the assumption that since they elected Hamas, they must sympathize with the terrorists though not engaging in terrorists acts themselves).

Here is the official Israeli explanation of its proportional representation system:

Summary:Israel has an electoral system based on nation-wide proportional representation, and the number of seats which every list receives in the Knesset is proportional to the number of voters who voted for it. The only limitation is the 1.5% qualifying threshold. In other words, a party must receive at least 1.5% of the votes in order to be elected. According to this system, the voters vote for a party list, and not for a particular person on the list. Since the institution of the primaries system in some of the parties, these parties directly elect their candidates for the Knesset. Some of the parties elect their candidates via the party's institutions. In the ultra-religious parties their spiritual leaders appoint the candidates. The Knesset elections take place once every four years, but the Knesset or the Prime Minister can decide to hold early elections, and under certain circumstances can serve for more than four years.

The electoral systemIsrael has an electoral system based on nation-wide proportional representation. In other words, the number of seats that each list receives in the Knesset - the House of Representatives - is proportional to the number of votes it received. Unlike most of the Western parliamentary democracies, the system in Israel is followed in an extreme manner, and the only limitation on a list which participated in the elections being elected is that it should pass the qualifying threshold, which is currently 1.5% (until the elections to the 13th Knesset the qualifying threshold was only 1%).

Historical backgroundThe State of Israel inherited the rigid system of proportional representation from the political system of the yishuv (the organized Jewish community) in mandatory times. This system was based on the zeal with which the various political parties - in which ideology and personalities played a major role - fought to preserve their independence. The justification given for the large number of parties resulting from the system was, that in a period in which major, far-reaching and rapid changes were still taking place in the population make-up as a result of immigration, it was important to enable maximal representation for various groups and opinions.

Sixty-four percent of Israelis say the government must hold direct talks with the Hamas government in Gaza toward a cease-fire and the release of captive soldier Gilad Shalit. Less than one-third (28 percent) still opposes such talks.

The figures were obtained in a Haaretz-Dialog poll conducted Tuesday under the supervision of Professor Camil Fuchs of Tel Aviv University.

According to the findings, Israelis are fed up with seven years of Qassam rockets falling on Sderot and the communities near Gaza, as well as the fact that Shalit has been held captive for more than a year and a half. AdvertisementAn increasing number of public figures, including senior officers in the Israel Defense Forces' reserves, have expressed similar positions on talks with Hamas.

It now appears that this opinion is gaining traction in the wider public, which until recently vehemently rejected such negotiations.

The survey also showed that Likud voters are much more moderate than their Knesset representatives. About half (48 percent) support talks with Hamas.

In Kadima, 55 percent are for talks, while among Labor voters, the number jumps to 72 percent.

With regard to Tuesday's High Court ruling rejecting petitions against ex-president Moshe Katsav's plea bargain, about half of those polled said the decision was not justified.

Supreme Court President Dorit Beinisch, who was part of a minority position against the plea bargain, can thus take some comfort that many people are with her. About one-third of those polled supported the majority opinion in favor of the plea bargain.

On the suspended sentence and fine Katsav is likely to receive, about half of those asked (47 percent) said the sentence was not harsh enough, as opposed to 29 percent who said the punishment was "fitting," and 8 percent who said it was "too harsh."

Here is a link to the news account in the Washington Post which brought the poll to my attention: Former President Carter to Meet With Hamas Chief. The relevant paragraph reads: "However, Carter's trip would also come at a time when a growing number of experts in the United States and Israel have argued that isolating Hamas is not productive. A poll published in February in the Israeli newspaper Haaretz found that 64 percent of Israelis favor direct talks with Hamas. Both Efraim Halevy, a former head of the Mossad spy agency, and Shlomo Ben-Ami, a former foreign minister, say Hamas can no longer be ignored."

"The first panacea for a mismanaged nation is inflation of the currency; the second is war." -- Ernest Hemingway, Esquire magazine, September 1935

There is still time to covet and honor the American greenback as the strongest link of stability in the international financial system. [But] the "golden moment" that enveloped the global economy for most of this decade is fading -- at least psychologically if not materially -- as we reach the end of an era of hubris in global affairs.

[The moment is fading] not just because President Bush will leave the White House next year, although that will help. The brash Texan has personified the global zeitgeist of his time: one of audacity curdling into hubris. He was elected to pursue a powerful nation's impulses and ambitions to be stronger and richer than any country in history, and he and his compatriots have pursued those dreams into the ditch.

However necessary and skillfully managed, the rescue efforts [of the Federal Reserve] add devastating new pressure on the dollar's value as a traded currency (which then affects oil and other commodity prices) and on rising U.S. inflation rates. They also eat into the fixed-income investments of many retirees. Like so much that has happened on Bush's watch, the bill for today's maneuvers will come due after he has gone.

It is hard to see how the world's global trading and financial systems can be fixed or even rebalanced without committed and credible American leadership based on realism and not hubris. But it is even harder to see that leadership coming forth unless the United States can first put its own house in order.

Hoagland doesn't say so directly, but it's implicit in his argument that we're at risk of destroying the status of the dollar as the world's standard currency. This de-facto standard has given Americans the ability to set internal monetary policy without considering international repercussions. As this site points out:

Today over half of all dollar notes in circulation are held outside the borders of the US. Almost half of US Treasury securities are owned by foreigners, mainly held as reserves by foreign central banks. The dollar is the main currency in international capital flows, as well as the currency of invoice for commodities and for many manufactured goods and services. All countries that trade directly with the US invoice both imports and exports in US dollars. . . . The US can issue dollar-denominated claims to the rest of the world which may never have to be redeemed so long as it maintains the domestic purchasing power of the dollar. While this gives the US a unique advantage in terms of borrowing in its own currency, the existence of a safe reserve asset is a great convenience to other countries. Only a serious loss of confidence in the dollar could depose it as the primary medium of international exchange, such as might be due to a prolonged major inflation in the US.

It's the "loss of confidence" in the dollar that's now becoming a realistic possibility and the failure of Americans to recognize this fact is part of the hubris that Hoagland warns against.

Friday, April 04, 2008

E.J. Dionne Jr. helps to answer a question I've been asking myself lately. Long ago when I was young the Democratic Party was a coalition of unlikely forces: liberal urban elites, old-line progressives of the West, minority groups such as Jews and Negroes, voters in cities run by machine politicians, members of trade unions, working-class whites whether union members or not, and -- jarringly -- virtually the whole South. This coalition fell apart in the third quarter of the 20th century.

Liberals and minorities remain generally Democratic. The western progressives and machine politicians have gradually died off I think. I knew the South switched its loyalty during the sea-change in Federal race policy during the 1950s and 60s. That was pretty easy to see. In the 1970s many young men and women who would naturally have become Democrats became independent voters in reaction to the war in Vietnam.

I couldn't recall what caused the working-class whites -- many of them union members -- to join the Republican ranks.

A shrewd politician named Richard Nixon sensed the direction of the political winds. When President Johnson's commission on urban unrest released its report in early 1968 and blamed the previous year's rioting on "white racism," Nixon would have none of it. The commission, he said, "blames everybody for the riots except the perpetrators of the riots." He urged "retaliation." . . . It is easy to forget that the core themes of contemporary conservatism were born in response to the events of 1968. The attacks on "big government," the defense of states' rights, and the scorn for "liberal judicial activism," "liberal do-gooders," "liberal elitists," "liberal guilt" and "liberal permissiveness" were rooted in the reaction that gathered force as liberal optimism receded.

Here's a quick message. This was a super day. I had hoped win the time trial, and winning the whole three-day race is entirely fantastic. My form was great. I had real power today in the time trial. I was riding well at the first time check and in the last four kilometres I kept on driving driving hard to the finish. Last year I finished second overall in the race. And now I have two podium finishes in it. Fantastic! I'm on my way to Lanaken now with Rick Flens, who also rode a good race. [Lanaken is site of the Amstel Gold race later this month.] And then on to the Ronde van Vlaanderen [on Sunday]. Greetings, Joost.

Cyclingnews says Posthuma's win was most impressive. The article says last year's winner of Three Days of De Panne went on to win the Ronde van Vlaanderen, but Joost isn't saying he can do that (I quoted him on this in the previous post). The article quotes him as saying the win is a very special victory for him and a totally unexpected one. He was surprised when he proved able to overcome a 27 second deficit in the afternoon TT, and didn't really think he had a chance until he found himself passing the rider who had started a minute before him. That gave him confidence to give it all he had up to the finish. The author also says he's got the knowledge and skill to win other big stage races and quotes him as saying "I'm not a specialist in the high mountains, but I can climb for sure. Overall, I'm a very constant rider."

Velonews calls Joost a "Dutch flier" and says he credits hard winter training for his time trial success.

Today Joost Posthuma won a major stage race, the Three Days of De Panne. He did this by placing high in the first three stages and acing this afternoon's time trial. The race is ideal for him since many of Europe's top riders are focussing on Sunday's Ronde van Vlaanderen, a one-day race that is one of Europe's most hotly-contested. Asked about prospects for that race, Joost told an interviewer that Rabobank's Juan Antonio Flecha will be the protected rider. "Flecha is our absolute leader for Sunday," he said, "But if I am in the right place at the right time, I might try for the win. Why not? I exclude nothing."